Abstract

Building on the work originally done for the Enhanced Business Reportingconsortium of the AICPA, this paper develops a test bed for innovation in business reporting. Aswith flying test beds in aviation, the object is to explore the impact of new technologies andtechniques rather than to create a product intended for immediate implementation. The startingpoint of our analysis is that if the financial reporting system was being built from scratch today,it would look very different, taking into account fundamental changes in the two drivers offinancial reporting: First, the dominance of market making by professional investors, whichincludes such intermediaries as pension and mutual funds, which is how most ordinaryindividuals interact with the market; Second, the reduction in the variable costs of disclosures totechnology-enabled firms, while time taking a broader view of the cost of reporting to includethe opportunity cost to the firm from faulty disclosures and the cost to professional investors ofhaving to extract the data they need from statements that were not designed for their needs.Taken together, the consequence of these two changes is that a system being designed today hasto rethink the entire process by which financial data held by the firm is translated into decisionrelevant information by users. This process takes place both within the firm and outside of it,with a handover of financial statements taking place at the boundary between the firm and itsusers. Given these changes it is time to ask whether the location of that handover boundary pointis still appropriate: whether the firm should continue to aggregate and condense informationextensively before releasing it, or whether sophisticated users would prefer to have access tomore information in closer to its raw format so that they can manipulate and aggregate it as they see fit. Based on this conceptual model we discuss the building blocks of a 21st centuryreporting system and the technical architecture needed to implement it. It is our hope that thispaper will help create an open source test bed that will develop new ways to measure, manageand communicate firm performance in the 21st century.

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